Rising Rents Could Cause A Big Bump In The Inflation Rate

Demand for
residential rentals have been on the rise as many prospective
homebuyers remain reluctant to pull the trigger.

Joseph LaVorgna of Deutsche
Bank expects this phenomenon to cause a significant bump in
inflation.

From his recent note to clients:

For starters, remember that services dominate the core CPI,
accounting for almost 80% of the index. Within services,
rents—both owners’ equivalent rent and rent of primary
residence—are the dominant subcomponent with a weight of nearly
60%.

Rental vacancies have dropped to 8.6%, the lowest level in a
decade, which has caused significant upward pressure to price.
Here's a chart from LaVorgna's note:

Deutsche Bank

More from the note:

In the past when the vacancy rate was at similar levels, shelter
inflation was running above 3% compared to roughly 2% at present.
As such, there appears to be little reason to believe that the
slight deviation in the CPI shelter uptrend is anything more than
a short-term wobble. A rise to a 3% annualized increase
in shelter costs will lift the growth rate in core inflation by
40 bps. This is a sizeable increase.